Macros, stable tax structure make India key PE destination: KKR India head

It is open season for private equity (PE) investors in India. The numbers show an almost 40 per cent jump in the value of deals last year, as compared to two years ago. 

According to consultancy EY’s monthly deal tracker, the first quarter of 2018 saw infrastructure and real estate drive investment worth close to $8 billion across 180 deals, the best quarter by volume in the past decade. Exits were lower by a tenth as compared to the same time last year but there are indications of the increasingly pivotal role of private funds in the corporate world.  

Sanjay Nayar, who heads KKR India, says the macro economic environment and stable tax structures make this country a prime destination. And, has evoked increased interest from LPs (Limited Partners) — large investors who put money in PE funds. Kohlberg Kravis and Roberts (KKR) draws  from its Asia fund, in its third issue, and is pegged at $9.5 billion. Broadly, Asia-I, Asia-II and the current fund dedicate around a fifth of their money to India. 

Nayar, however, cautions that despite the entry of foreign funds, it will ultimately have to be domestic savings that will build the country. "If you look at America, everything from sewage systems to bridges and flyovers are financed by local municipal bonds, which we don't have yet in India.” Private capital plays an important role but some gaps can only be filled by deeper national local savings, he says. At the end of the day, no nation-state has emerged on the back of private capital alone.

Closer analysis shows most PE deals are refinancing transactions. Refinancing leverage, a promoter or the earlier PE company is not asset or value creation in the true sense, Nayar says. Exhibit: the $16-billion mega WalMart-Flipkart deal that just happened is an exit for earlier investors Naspers and Tiger Global, though Tiger is retaining a part of its stake.  

Ahead

Despite that, Nayar sees three broad themes playing out for the future. The first is happening significantly in Japan and is de-conglomeration or divesting of assets by houses that own hundreds of businesses which they aren't able to manage efficiently, as these are spread too thin or not focused enough. For instance, Larsen & Toubro recently sold its electrical business to Schneider, as did Avantha its US power and distribution business to Brazilian firm WEG. 

Next up is growing consolidation, impacting most sectors because of inherent fragmentation. “You wouldn't believe how many discussions we are in with one and and two-location hospital operators," Nayar says. KKR India is an investor in Radiant Life Care and both are also vying for Fortis' assets. Third, Nayar says, succession will drive changes as business houses and companies alike see the baton change hands and next-generation leaders either take charge or hand over and move on. In other words, family businesses might not be up for sale but they're interested in leaner, more efficient operations.

KKR's Indian operations over the past eight years have culminated in the setting up of four core businesses. These are the PE fund which draws from KKR's Asia allocation, an asset reconstruction company whose incorporation is underway, a corporate non-banking financial corporation and a real estate-specific non-banking financial corporation. The latter three of which are permanent companies in India. 

The method

“We have tried to keep an approach of one-ness to companies by offering capital solutions covering mezzanine, PE solutions, real estate financing and so on because if you had a purely buy-out approach it might not have worked in the country,” Nayar says.  He cites Metropolis as an example where the deal was originally meant to be a PE deal but then became a debt one, where KKR India switched the platform and allowed the promoter to buy her company back from investors and pay off co-founders. "We didn't worry that it wasn't a PE deal," he explains.

The multi-pronged approach also allowed Nayar to place bets in sectors that are opening up. Emerald Media, for example, is a new digital content company where KKR India invested $300 million. As is Avendus Capital, a new-age asset management and investment bank that received Rs 10 billion in funding, led by KKR. 

There are other transactions that KKR India would have missed out on if they did only straight PE deals. Recently, a manufacturer needing Rs 6 bn in working capital only got sanction for Rs 4 bn from his bank, which tightened processes in the wake of the PNB-Nirav Modi fraud. Enter KKR India, in the process of fronting the balance.

Nayar says he's comfortable because the firm generates operating earnings of Rs 2 billion on a turnover of Rs 15 b, is not a non-performing asset but is stymied because of a plant expansion plan, with orders pending. As bank managers are reticent to sign loans, KKR India is going to take pledged shares and allow the manufacturer to build the business. It's an entirely different mantra from how the PE player operates in developed markets, where its moves are underscored by big-ticket leveraged buyouts — not  a collaborative funding approach but that's the need of the hour. 

Despite Nayar’s refrain about the need for domestic savings, he says PE funding has had positive rub-offs. Companies are developing deeper talent, rather than hoping to find it in two or three multinationals. It’s also reinforcing governance as employees trust appraisal, bonus and employee stock options in PE-backed firms. 

Beside pushing for independent directors’ accountability and, finally, better returns, led by a focus on profitability.

Even so, is KKR India comfortable with being a minority investor across deals? Nayar says he doesn't see why not. Max and SBI Life, for example, were minority deals but transacted under different conditions because in insurance, minority is the only way to play the sector for a foreign investor. "The bottom line is if we believe in a theme, we will make a play for it," he adds.

A SNAPSHOT OF PE ACTIVITY AND DEALS